Monday, January 9, 2017

Landowners Lose in Denbury v. Texas Rice Land Partners

Last week the Texas Supreme Court wrote the final chapter in Texas Rice Land Partners’ efforts to prevent Denbury Green Pipeline-Texas, LLC from condemning an easement across its land for a CO2 pipeline. The court held in Denbury Green Pipeline-Texas, LLC, v. Texas Rice Land Partners, Ltd., et al., No. 15-0225, Denbury opinion, that Denbury had shown as a matter of law that its line would serve a “public use.” (Our firm represented Texas Rice Land Partners in this appeal.)

This fight began in 2007, when Texas Rice Land Partners denied Denbury permission to enter its property to survey for a CO2 pipeline. Under the law as then understood, Denbury had obtained the requisite permit from the Texas Railroad Commission to construct its line and under that authority asserted that it had the right to condemn an easement for the line and therefore the right to survey Texas Rice Land’s property to construct the easement. Texas Rice Land denied Denbury’s right to survey, asserting that Denbury’s use of the line would be only for its private purposes and not for a “public use.” The trial court denied Texas Rice Land’s effort to stop the surveying; Denbury surveyed the easement and constructed its line across Texas Rice Land’s property. But Texas Rice Land appealed the trial court’s ruling. The Beaumont court of appeals affirmed the trial court but, in 2012 the Texas Supreme Court reversed and remanded the case. Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas LLC (363 S.W.3d 192 (Tex. 2012) (Texas Rice I)

In Texas RiceI, the Court held that, under Texas’ constitution, a pipeline does not acquire condemnation authority merely by obtaining a permit from the Railroad Commission and subjecting itself to that agency’s jurisdiction as a common carrier. The Commission makes no determination whether the intended use of the pipeline is in fact “public.” The court then held that in order for a pipeline to serve a public purpose, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.” Once a landowner challenges its status as a common carrier, “the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain.” (The court also held that one affiliated company transporting gas solely for the benefit of another affiliate is not a public use of the pipeline.) The court said that the question of whether the pipeline is dedicated to a “public use” is ultimately a judicial question. The court held that the summary judgment evidence submitted by Denbury that it might in the future transport gas owned by others was not sufficient to show that the pipeline would be used for a public purpose. The court remanded the case to the trial court for a trial of whether Denbury’s pipeline would serve the public by transporting gas for customers.

On remand to the trial court, Denbury submitted additional summary judgment affidavits in support of its claim that it met the test set out by the Supreme Court in Texas RiceI. By that time the pipeline had been constructed and was in operation. The summary judgment evidence showed that the line transports carbon dioxide from Jackson, Mississippi, where it is produced from wells in the Jackson Dome, to the West Hastings Field in Brazoria County, Texas, where the carbon is injected into the field and used for tertiary recovery operations. Denbury affiliates own the operations where the carbon dioxide is produced, the pipeline transporting the gas to Brazoria County, and a majority interest in the unit in the West Hastings Field in Brazoria County where the carbon dioxide is used in tertiary recovery or “CO2 flood” operations.

Because the Supreme Court had held in Rice Land I that such use of the pipeline was not for a “public purpose,” Denbury also provided affidavits showing that it had entered into two transportation agreements with unaffiliated third parties, Airgas Carbonic and Air Products and Chemicals, to transport CO2 through the line for those companies. The Airgas Carbonic transportation agreement was entered into in January 2013, six years after Denbury asserted common-carrier status for its pipeline. Under that agreement, Denbury transported Airgas CO2 from the Texas/Louisiana border to a new Airgas Carbonic manufacturing plant in Brazoria County. The Airgas CO2 is then sold to Airgas customers in the Houston area.

Denbury’s contract with Air Products was entered into in or after 2010. Air Products contracted with Denbury to transport CO2 produced at the Valero Refinery in Port Aurthur, Texas to the West Hastings Field in Brazoria County, where title and ownership of the CO2 passes to Denbury and the gas is used in Denbury’s tertiary recovery operations. So the ultimate use of the Air Products CO2 is the same as that for the CO2 produced by Denbury from the Jackson Dome, and Denbury buys the CO2 from Air Products for the purpose of Denbury’s CO2 flood operations.

Finally, Denbury’s affidavit said that it planned its pipeline to be close to refining and manufacturing facilities along the Gulf Coast for the express purpose of seeking contracts with third parties to transport CO2.

Based on this additional evidence, the trial court again granted summary judgment for Denbury. On appeal to the Beaumont Court of Appeals, that court again reversed and remanded, holding that “reasonable minds could differ regarding whether, at the time Denbury Green intended to build the Green Line, a reasonable probability existed that the Green Line would serve the public.” 475 S.W.3d 115, 121-22 (Tex.App.–Beaumont 2015). The Texas Supreme Court granted review.

The Supreme Court’s opinion, written by Justice Green, was joined by all members of the court except Justice Johnson, who joined in the judgment only. The Court held that “the evidence adduced by Denbury Green on remand established as a matter of law that there was a reasonable probability that, at some point after construction, the Green Line would serve the public by transporting CO2 for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.” The Court held that the court of appeals had erred in disregarding the evidence of the Airgas Carbonic contract because that contract was entered into after the pipeline’s construction, and “the relevant evidence that the Green Line’s future public use could be supported by its proximity to other CO2 shippers once construction was completed.”

Keep in mind that Texas Rice never got a jury trial. Although the Beaumont Court of Appeals held that fact issues existed as to whether Denbury’s use of its line was a “public use,” both the trial court and the Texas Supreme Court held that Denbury had shown “as a matter of law” that it was entitled to condemn an easement across Texas Rice’s land. The phrase “as a matter of law” means that the court has held that no reasonable person could conclude that Denbury is not a common carrier. By so holding, the Texas Supreme Court denied Texas Rice a jury trial.

As I have written before, the Texas Supreme Court’s jurisdiction is limited in one important respect. The Court has jurisdiction only over questions of law, not issues of fact. An intermediate appellate court in Texas can overturn a jury verdict and remand for a new trial if it finds the jury’s verdict to be against the “preponderance of the evidence.” But the Supreme Court can overturn a jury verdict only if it finds that there was no evidence to support the verdict. Likewise, the Supreme Court can overturn a court of appeals’ judgment holding that there are fact issues that must be determined by a jury only if the Supreme Court holds that the summary judgment evidence proves the disputed fact “as a matter of law” and that no reasonable person could differ as to the facts at issue in the suit.

The only new “evidence” produced by Denbury to prove its right to condemn an easement across the Texas Rice property was (i) an affidavit from Denbury that it placed its line close to Texas refineries and CO2 sources along the Gulf Coast because it intended to use its line to transport gas for others, and (ii) a contract with Air Products to transport CO2 for it, entered into several years after Denbury had condemned an easement across Texas Rice’s property and constructed its pipeline. (Denbury’s evidence of the Air Products contract, which was to deliver CO2 to Denbury at its West Hastings Field tertiary recovery project, was not considered relevant because, in Texas Rice I, the Court had already held that use of the line to supply CO2 to Denbury’s wells was not sufficient to establish a public purpose.) It is difficult for me to understand how this additional summary judgment evidence establishes as a matter of law that Denbury was a common carrier when it sought to condemn an easement across Texas Rice’s property.

The Supreme Court’s decision in the first Texas Rice case created a stir in the pipeline industry. In the next legislative session, the industry unsuccessfully lobbied for legislation to “fix” the problem. The Supreme Court’s second opinion significantly erodes the precedential value of its first opinion and the ability of landowners to challenge the common-carrier status of companies asserting the right to condemn easements across their land.